Business models and the Internet of Things

Suitable business models will play an important role when it comes to leveraging the opportunities of the Internet of Things. But what exactly is a business model? My colleagues here at the University of St. Gallen (HSG) came up with a pretty simple definition. They call it the magic triangle. Answering the four questions gives a brief idea of how the business of a company works.

Source: University of St. Gallen, Institute of Technology Management

The St. Gallen Magic Triangle

Most probably, the majority of successful business models in the Internet of Things (IoT) will not follow the pattern: “A vendor sells a physical item to a customer.” The IoT ties together non-physical items such as data and services to physical things and devices. Therefore, more sophisticated and maybe even new business models will play a major role. But, how to come up with a “new” or “innovative” business model? Good news: it’is not the Quest for the Holy Grail…

Again, the Business Model Innovation Lab at the University of St. Gallen provides us with a very useful tool. They analyzed some 350 cases of disruptive business models from American Express Traveler Cheques to Zara. And found 55 underlying business model patterns such as “Freemium”, for example. For a better overview a subway map has been drawn with 55 lines (Business Model Patterns) and many stations (cases). These patterns serve as a kind of building blocks for new business models. They provide external inspiration to the process of creating new ideas for a company´s business. Combining or transferring them to new industries creates new solutions.

Of course, these patterns are helpful for creating Internet of Things business models as they cover diverse industries and sectors. But, we at the Bosch IoT Lab@HSG have the feeling, that the Internet of Things has the potential to create completely new business model patterns, as did former technological developments. Many of those 55 patterns require certain preconditions. Imagine a “Licensing” model without the existence of a reasonable patent system, for example. Another well-known example is “Freemium” – distributing a basic product for free while charging for premium versions. As Chris Anderson points out in his book “free”, the freemium model only works for digital products. As in the digital world marginal cost are close to zero. Thus, the business model pattern “Freemium” requires the internet as a distribution channel for digital goods as a precondition.

We are currently analyzing the influence of IT and the internet on business models to better understand the past. At the same time we are trying to glance at the future. We are searching mechanisms enabled by IoT with potential influence on business models. This is mainly a question of a suitable level of abstraction. Being too detailed will just add confusion; if flying too high, we might miss interesting details.

Overall, I am convinced: The Internet of Things will influence business models. And we will soon be able to get an idea how this might look like.

But maybe you can help us. What is your opinion? Which aspects of the Internet of Things will have major impact on successful business models? Do you already see new business models leveraging the IoT?

More on IoT business models

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9 Comments

3. May 2014 at 19:14

HI,

Current experiences of RFID / EpcGlobal standards open loop implementation start to show us the latent value lying in proto-IoT I can’t tell about clever implementations of “smart objects” but guess that industrial use cases could help to test BM designing methods

Hi Yann, sure industrial use cases for the IoT – often referred to as Industry 4.0 – are interesting to apply BM design methods. Especially as I could imagine that industrial and consumer use cases could learn a lot from each other. What I mean is that BM up to now only feasible in industrial applications could become reasonable for consumers as well. Today a condition monitoring service makes mainly sense for say wind turbines; these services are coming for cars and why not have something similar for household appliances in future.

I fully agree to the idea of discovering IoT business models. I would be happy if our research could contribute to guide the discoverers. It could make a difference not to start sailing anywhere, but straight to the West. Given you know it´s promissing to sail to the West for whatever reason.

My belief is that business models will be “discovered” and more importantly the value of IoT/IoE will be determined by companies that start playing an active role and participate in the value chain of first connecting everything to the Internet, and then realizing the unlocked value.

Nice blog Markus. IoT does remind me of what we got involved with with RFID 10 yrs back. We had a kind of “funnel-on-its-side” architecture with concentrators close to the physical devices. I think whoever can tie IoT into a general purpose application middleware platform will win big going forward.

Hi Stephane, thanks a lot for the inspiring exchange! I´d like to reply on your “that´s the point”: A few months ago I would have totally agreed to “As little hardware as possible” and “All logic in the cloud”. Meanwhile I see two important points when it comes to the question how to start spreading the IoT. 1. In many cases that I saw in the last months it is easy to sketch out huge ecosystems with many stakeholders that leverage many many use cases. The big question is: “How to get there? Where to start?” All these cases need to find a core setup as a feasible (market-, technology and money-wise) starting point. This means focussing on just very few use cases (products or services). 2. Once this starting point has been found one has to make sure that the entry barrier for the customer is as low as possible. Only little or no upfront investment. Installation and configuration as easy as possible, if requried at all. Good support in case of troubles. And so on.

Hi Markus, I also share your point of view regarding the young character of ioT and the fact every company in this business try to provide a complete solution to the end customer. The potential of standardization and platform solutions in Iots is much bigger than we currently experience in automotive software engineering for example. I like the example of the watch too. And that s the point: we should take out the most functions, services with as less hardware as possible. Another example illustrating this: Control a smart home with a smart phone supporting zigbee protocol and no further needs for extra zigbee controller, gateway… Each OEM shall bring connectivity into its products (the question is which one: Wifi, BT, Zigbee….) and provide a cloud platform to control, update the appliances. Then implement and sale specific services out from this cloud platform. I am looking forward to see which OEM will spraid Iot(s) such as facebook spraid Web2.0

For today crowdfunding (kickstarter) and crowdsourcing (mturk) fuel many startups not only in the IoT. But IoT is comparatively young. In this young environment many companies offer vertically integrated soultions. They build everything from HW to Backend to App. But how will things change once the plattforms and global standards you mentioned emerge?

The thought of specific services I like very much. Things can gain a completely different meaning by adding connectivity to them. For example: A watch can become an emergency device once you add connectivity and provide an emergency call center service.

Future business may be organized around these 2 worlds: freeware (open source): we share, improve “platform things” which are of global relevance (i.e. Wikipedia, Android…) for free specific services: customized virtual services or services for a specific hardware will generate revenue.

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